2014 (5) TMI 891 - AT - Income Tax

Diversion of income by overriding title - interest earned on grants Grants received and shown as payable to the Govt. of Gujarat Held that - Following Gujarat Municipal Finance Board Versus Deputy Commissioner Of Income-Tax (Assessment) 1996 (5) TMI 71 - GUJARAT High Court - the interest was diverted at source by an overriding title in favour of the State Government - the interest was held not to amount as income of the Gujarat Municipal Finance Board and it was held that the interest was diverted to the State Government by an overriding title - The directive was reiterated in the certificate issued by the Principal Secretary - The directives created an overriding title in favour of the State Government so far as the interest element was concerned thus, the interest cannot be assessed as the assessee s income - CIT(A) has rightly followed the order of the Tribunal Decided against Revenue. Deletion of refund of grant to DRDA Held that - As decided in assessee s own case for the previous year, it has been held that the assesee is entitled to succeed - once the amount is assessed as income, it cannot be added back to the assessee s income over again - the grants cannot be assessed as income as they were made for specific or assigned projects relying upon C1T Vs. Ganga Charity Trust Fund 1985 (10) TMI 67 - GUJARAT High Court - for the purpose of applying the income of the trust for charitable purposes, income derived from the trust property must be determined on commercial principles and in doing so, all outgoings including income-tax must be deducted and it is only from the surplus income in the hands of the trustees that the question of application of income can arise - the amount which was earlier assessed as income, refunded to DRDA during the year, constitutes a deduction while ascertaining the application of the income for the purpose of section 11(1)(a) of the Act Decided against Revenue.

Summary

Issues:
1. Whether interest earned on grants received and shown as payable to the Government of Gujarat is taxable as income in the hands of the assessee?
2. Whether the refund of grant made to District Rural Development Agency (DRDA) should be treated as an application of income for the purpose of trust?

Analysis:

Issue 1:
The appeal filed by the Revenue challenged the deletion of the addition of interest earned on grants received and shown as payable to the Government of Gujarat. The Assessing Officer (AO) contended that the interest income should be taxed as income in the hands of the assessee as it was diverted for purposes other than the trust's objectives. However, the assessee argued that the interest was not income but a liability, citing a decision by the ITAT in a previous assessment year. The ITAT held that the interest did not belong to the assessee and should not be taxed as income, following the principle that the interest was diverted at source by an overriding title in favor of the State Government. The judgment of the Hon'ble Gujarat High Court supported this view, leading to the dismissal of the Revenue's appeal.

Issue 2:
The second issue involved the deletion of an addition made on account of the refund of a grant to DRDA. The AO taxed the refunded amount, arguing that it should not be treated as an application of income for the trust. The assessee contended that the refund should be reduced from the income, following the decision of the ITAT in a previous year. The ITAT upheld the assessee's contention, stating that the refunded amount constituted a deduction while ascertaining the application of income for the purpose of section 11(1)(a) of the Act. The judgment of the Hon'ble Jurisdictional High Court further supported this view, resulting in the dismissal of the Revenue's appeal.

In conclusion, both issues were decided in favor of the assessee, with the ITAT upholding the decisions of the lower authorities based on legal principles and precedents established in previous judgments.